Looking for ways to avoid acting like a fiscal lemming

Published: Thursday, July 12, 2012 at 1:00 a.m.

Last Modified: Wednesday, July 11, 2012 at 9:28 p.m.

"We are facing a fiscal train wreck at the end of this year. It is time to move off of fixed positions." – Sen. Kent Conrad, Democratic chairman of the Senate Budget Committee

Congress has less than six months to prevent the American economy from falling off a so-called fiscal cliff. If it does not act, on Jan. 1, 2013, a combination of tax hikes and $1.2 trillion in budget cuts will be implemented.

The Congressional Budget Office, Ben Bernanke, chairman of the Federal Reserve, and the International Monetary Fund all have said these events would probably throw the country back into recession. The IMF also warned America's fall off the fiscal cliff could deal a devastating blow to the world economy.

If Congress does nothing, 82.9 percent of U.S. households would face tax increases averaging $3,701, according to the Tax Policy Center, a nonpartisan research group. More than 98 percent of households earning more than $50,000 a year would pay higher taxes. In addition, the Affordable Health Care Act imposes a dividend "surtax" of 3.8 percent on families making more than $250,000 a year, starting in 2013.

Other events that could combine to push the U.S. into the fiscal abyss:

The expiration of the Bush-era tax cuts at the end of 2012 would raise rates on capital gains, dividends, income and estates and other taxes.

An additional 26 million households would be subject to alternative minimum income taxes.

The expiration of the payroll tax cut would lower weekly income about $20 per worker.

A$500 billion decrease in defense spending, to be phased in over 10 years, would cut $55 billion next year.

Lawmakers in both parties have said they do not expect Congress to act until after the Nov. 6 election on most or all of the tax-and-spending issues that comprise the fiscal cliff. The two parties are just too divided.

But lawmakers must make progress to put the budget on a sustainable path in order to reduce the likelihood of a future fiscal crisis and to foster economic recovery. Controlling the rising costs of Medicare and Medicaid and ensuring the long-term viability of Social Security are essential to a healthy budget.

Trillion-dollar budget deficits are driving up government borrowing levels at an alarming rate, and outstanding U.S. debt is projected to exceed the nation's gross domestic product. At some point, the pressure of rising borrowing costs will force policymakers to increase tax rates and cut government spending.

The Simpson-Bowles Draft Recommendations, released in November 2010, could be the basis for a compromise. They sought to lower deficits to 3 percent of GDP from the current 9 percent. The proposed ratio to balance the budget was 70 percent spending cuts and 30 percent tax increases.

<p><i>"We are facing a fiscal train wreck at the end of this year. It is time to move off of fixed positions." – Sen. Kent Conrad, Democratic chairman of the Senate Budget Committee</i></p><p>Congress has less than six months to prevent the American economy from falling off a so-called fiscal cliff. If it does not act, on Jan. 1, 2013, a combination of tax hikes and $1.2 trillion in budget cuts will be implemented.</p><p>The Congressional Budget Office, Ben Bernanke, chairman of the Federal Reserve, and the International Monetary Fund all have said these events would probably throw the country back into recession. The IMF also warned America's fall off the fiscal cliff could deal a devastating blow to the world economy.</p><p>If Congress does nothing, 82.9 percent of U.S. households would face tax increases averaging $3,701, according to the Tax Policy Center, a nonpartisan research group. More than 98 percent of households earning more than $50,000 a year would pay higher taxes. In addition, the Affordable Health Care Act imposes a dividend "surtax" of 3.8 percent on families making more than $250,000 a year, starting in 2013.</p><p>Other events that could combine to push the U.S. into the fiscal abyss:</p><p><pbs:dingbats char="n">The expiration of the Bush-era tax cuts at the end of 2012 would raise rates on capital gains, dividends, income and estates and other taxes.</p><p><pbs:dingbats char="n">An additional 26 million households would be subject to alternative minimum income taxes.</p><p><pbs:dingbats char="n">The expiration of the payroll tax cut would lower weekly income about $20 per worker.</p><p><pbs:dingbats char="n">A$500 billion decrease in defense spending, to be phased in over 10 years, would cut $55 billion next year.</p><p>Lawmakers in both parties have said they do not expect Congress to act until after the Nov. 6 election on most or all of the tax-and-spending issues that comprise the fiscal cliff. The two parties are just too divided.</p><p>But lawmakers must make progress to put the budget on a sustainable path in order to reduce the likelihood of a future fiscal crisis and to foster economic recovery. Controlling the rising costs of Medicare and Medicaid and ensuring the long-term viability of Social Security are essential to a healthy budget.</p><p>Trillion-dollar budget deficits are driving up government borrowing levels at an alarming rate, and outstanding U.S. debt is projected to exceed the nation's gross domestic product. At some point, the pressure of rising borrowing costs will force policymakers to increase tax rates and cut government spending.</p><p>The Simpson-Bowles Draft Recommendations, released in November 2010, could be the basis for a compromise. They sought to lower deficits to 3 percent of GDP from the current 9 percent. The proposed ratio to balance the budget was 70 percent spending cuts and 30 percent tax increases.</p><p>They would do this by:</p><p><pbs:dingbats char="n">Cutting the number and salaries and benefits of federal workers.</p><p><pbs:dingbats char="n">Reducing the costs of our health care systems.</p><p><pbs:dingbats char="n">Increasing the age of Social Security eligibility.</p><p><pbs:dingbats char="n">Decreasing defense and foreign policy spending.</p><p><pbs:dingbats char="n">Reducing entitlements, including farm subsidies, civilian and military federal pensions and student loan subsidies.</p><p><pbs:dingbats char="n">Cutting top personal and corporate tax rates to 26 percent.</p><p><pbs:dingbats char="n">Eliminating loopholes and tax breaks that cost $1 trillion a year in foregone revenue. These include mortgage interest deductions and credits for employer-health insurance.</p><p>The late Nora Ephron showed an appreciation for acting quickly in her movie classic "When Sally Met Harry."</p><p>Harry defended proposing to Sally on New Year's: "When you decide you want to spend the rest of your life with someone, you want the rest of your life to begin right away."</p><p>Hopefully, Congress will decide it wants to ensure the country is on a firm financial footing and will realize the time to act to accomplish that is now.</p><p><i>Ernest "Doc" Werlin is a local columnist who welcomes suggestions and comments at doc.werlin@gmail.com. Read past columns at docwerlin.com.</i></p>